Assume that two firms (Firm A and Firm B) are very similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors:

Question

Quizplus · Accepted Answer

In order to take advantage of the differential in returns between Firm A and Firm B, investors will buy the stock with the higher rate of return (Firm A) and sell the stock with the lower rate of return (Firm B), causing the prices to move closer together through arbitrage. Therefore, the correct choice is to buy Firm A's stock and sell Firm B's stock.

Assume That Two Firms (Firm a and Firm B) Are